Does Kazakhstan Need Tax-Free Shopping?

Yesterday Erlan Ospanov raised an interesting topic: refunds of value added tax (VAT) on purchases made in Kazakhstan. In other words, tax-free shopping.

What is tax-free? It is an exemption from VAT on exported goods. For example, when we export oil, uranium or grain, the state refunds exporters the VAT they paid in producing those goods.

In its classical form, value added tax is paid solely by the consumer of a good and solely within the consumer's own country. To avoid double taxation, exported goods are not subject to VAT, because they will be taxed later, when they clear customs in another country.

In effect, tax-free shopping is a derivative of the VAT refund system. A nonresident who buys goods in Kazakhstan and takes them abroad is an export buyer. In a properly functioning system, such a buyer should not pay VAT, since the goods are consumed outside the country where the VAT was paid.

There is, however, a small nuance that gives rise to many disputes: in his or her home country, this consumer will not pay VAT on importing the goods, and so avoids the tax altogether.

Developed countries use tax-free shopping solely to promote sales of domestically produced goods as exports and to stimulate the tourism industry.

Does Kazakhstan need such a system?

Unfortunately, Kazakhstan has nothing to stimulate, because we are not a country that mass-produces consumer goods. We produce raw materials, not consumer products.

So the idea of using this system to promote trade and support domestic production is a myth.

As for stimulating tourism through tax-free shopping, I doubt it. For that, a country has to be at least a regional trading hub, and we are nowhere near that. Whoever comes to us, it is certainly not for shopping.

This is also because we produce almost nothing ourselves and import most of our goods. Because the goods are imported, we add import duties, logistics, rent and the seller's margin, and end up with an imported good that costs more than in the country that produces it. So it is unlikely that anyone will want to shop here.

Of course, we could zero out all import duties, build modern shopping centers and become like Dubai, but we still have some growing to do before that.

But the fact is that the costs of introducing a tax-free system would be large. We would have to equip all the major stores, at least in the main commercial cities, bring in a Western partner with its system, equip the airports and set up accounting for VAT refunds. Under this scheme, businesses that sell goods with a tax-free form receive a deduction for that amount when they file their returns. The partner pays the exporter (the tourist) out of its own funds, then recovers all these sums from the state, keeping a commission.

Given our turnover, the system would take a long time to pay for itself. Moreover, introducing it would require changes to legislation, which would take a couple of years.

And on top of that, the question of abolishing VAT is currently being worked through, in which case this whole topic disappears altogether.

One more small remark: the state refunds the full amount of VAT presented by the partner, and the partner keeps a commission for itself. The VAT rate and the amount refunded to the tourist therefore differ, and this commission can reach up to 5 percent.

Also, many people calculate VAT incorrectly. To calculate it correctly, you first divide the purchase amount by 1 plus the tax rate, and only then multiply by the VAT rate. That gives you the correct amount of VAT.

Nor are the various municipal sales taxes that exist in different countries refunded, as they have nothing to do with VAT.